Virginia’s largest investor-owned utility (IOU) monopolies are currently incentivized to prioritize capital-intensive investments, which puts their profit motive at odds with cutting costs for consumers and meeting their mandated clean energy goals. Aligning utilities’ profit incentives with sustainability goals, such as the interconnection of distributed resources, grid reliability, and efficiency measures, can facilitate a swift and affordable clean energy transition that advances least-cost solutions. 

Virginians pay some of the highest energy prices in the nation, which disproportionately impacts low-income households and historically marginalized communities.^1,2,3 High energy costs are tied to the regulations of Virginia’s investor-owned utility (IOU) monopolies that reward utilities for capital-intensive investments rather than cost-saving measures – i.e., the more expensive a project is, the more profits the utility collects.⁴

High energy bills are tied to regulations that profit our investor-owned utility monopolies for expensive investments rather than cost-saving measures.

Under the current regulations, reducing energy usage with energy efficiency and expanding customer-owned distributed resources like rooftop solar conflict with utilities’ profit sources: building capital and selling electricity.⁵ Utilities’ incentives also conflict with buying clean energy from third-party developers through purchase agreements (PPAs) even when PPAs are less expensive than utility-owned projects.

Additionally, although utility monopolies’ regulation should simulate competitive incentives for cost reduction, the current framework undermines cost control incentives.⁶ A salient example is the usage of cost trackers – called rate adjustment clauses (RACs) in Virginia. Trackers allow utilities to recover costs and profits with zero risk to the IOUs, which removes incentives for efficient spending.⁷ Experts suggest restricting trackers to a few selected costs,^8,9 yet trackers are around 50% of IOUs customers’ electric bills.¹⁰ The fuel factor, for example, is a tracker that allows utilities to pass all fossil fuel costs to customers without affecting the utility’s profits, reducing the financial urge for minimizing fossil fuel expenses.¹¹

Recent legislation improved Virginia’s regulations by restoring the State Corporation Commission’s authority to prevent customer overcharges.¹² However, strong incentives for inefficient spending, that threaten an affordable clean energy transition, remain in Virginia’s code.

Virginia should further improve IOUs’ regulations to guarantee affordability while transitioning towards 100% clean energy. Needed improvements include lifting the cap on PPAs and shifting towards performance-based regulations that better align utility profits with affordability and environmental goals.

The cost of PPAs for utility-scale solar has dramatically declined nationwide.¹³ However, utilities have argued that the Virginia Clean Economy Act caps PPAs at 35% of the clean energy requirements. Thus, utilities do not consider PPAs beyond 35%, even when there are qualified PPAs that would be less expensive than utility-owned projects.¹⁴ To reduce clean energy costs, utilities should consider all qualified and cost-competitive PPAs.

Multiple states are studying broader reforms to utilities’ incentives through performance-based regulation (PBR). PBR shifts utilities’ exclusive focus on expensive capital projects towards other critical goals by creating financial incentives.¹⁵ Connecticut, Hawaii, Illinois, North Carolina, and Washington, among others, have initiated regulatory reforms to connect utility profits with goals like decarbonization, affordability, interconnection of distributed resources, and energy efficiency.¹⁶

For a successful PBR framework, it is crucial to also address the role of RACs or trackers in undermining cost control incentives. Virginia should align with regulatory best practices that suggest mainly using the base rate instead of trackers, to incentivize cost containment. Some states have also reformed the fuel factor, making IOUs responsible for part of fossil fuel costs, incentivizing greater control of fossil fuel expenses.¹⁷

Exploring reforms to Virginia’s IOUs incentives system will help ensure that an affordable, reliable, and equitable clean energy future is achievable.

¹ “Electric Sales, Revenue, and Average Price,” Table 6. Energy Information Administration (2021). https://www.eia.gov/electricity/sales_revenue_price.

² Ariel Drehobl and Roxana Ayala, “Review of How High Are Household Energy Burdens? An Assessment of National and Metropolitan Energy Burdens across the U.S. Washington, D.C.” American Council for an Energy-Efficient Economy (2020). https://www.aceee.org/research-report/u2006.

³ “Electricity Burden and the Myth of Virginia’s Rate Utopia,” Virginia Poverty Law Center (August 15, 2018). https://vplc.org/electricity-burden-and-the-myth-of-virginias-rate-utopia.

⁴ J. C. Kibbey. “Utility Accountability 101: How Do Utilities Make Money?” NRDC (January 20, 2021). https://www.nrdc.org/experts/jc-kibbey/utility-accountability-101-how-do-utilities-make-money.

⁵ “Aligning Utility Incentives with Investment in Energy Efficiency,” National Action Plan For Energy Efficiency, Page ES-1. Environmental Protection Agency. https://www.epa.gov/sites/default/files/2015-08/documents/incentives.pdf.

⁶ Petition of Virginia Electric and Power Company for approval of a plan for electric distribution grid transformation projects. Direct Testimony of Paul J. Alvarez submitted on behalf of Environmental Respondent. Pages 7 and 40. https://scc.virginia.gov/docketsearch/DOCS/5m1d01!.PDF.

⁷ Ken Costello, “Alternative Rate Mechanisms and Their Compatibility with State Utility Commission Objectives,” Page 32. (2014). https://pubs.naruc.org/pub/FA86C519-AF31-D926-BE12-2AC7AE0CD8D6.

⁸ Ken Costello, “How Should Regulators View Cost Trackers?” The Electricity Journal 22 (10): 20–33. (2009). https://doi.org/10.1016/j.tej.2009.10.015.

⁹ Melissa Whited and Cheryl Roberto, “Multi-Year Rate Plans Core Elements and Case Studies,” Page 11 (2019). https://www.synapse-energy.com/sites/default/files/Synapse-Whitepaper-on-MRPs-and-FRPs.pdf.

¹⁰ “Report on the Virginia Electric Utility Regulation Act,” Page 6. State Corporation Corporation Commission (September 1, 2022). https://rga.lis.virginia.gov/Published/2022/RD418/PDF.

¹¹ Herman K. Trabish, “Hawaii’s New Fuel Price Performance Incentive Gives HECO ‘Skin in the Game,’” Utility Dive (August 6, 2018). https://www.utilitydive.com/news/hawaiis-new-fuel-price-performance-incentive-gives-heco-skin-in-the-game/528329.

¹² Since 2007, investor owned utilities in Virginia overcharged at least $2 billion for the electricity service. The Affordable Energy Act – HB 1604/SB1321 and, after a long negotiation process, SB 1265/HB 1770 restored the State Corporation Commission’s authority to reduce rates when rates are set to overcharge customers.

¹³ “Utility-Scale Solar, 2022 Edition,” Pages 28-30. Lawrence Berkeley National Laboratory. https://eta-publications.lbl.gov/sites/default/files/utility_scale_solar_2022_edition_slides.pdf.

¹⁴ Environmental Respondent’s Comments on the Hearing Examiner’s Report. Petition of Virginia Electric and Power Company for approval of its 2022 RPS Development Plan. (Mach 14, 2023). Pages 2-3, 8-9. https://www.scc.virginia.gov/docketsearch/DOCS/7qv701!.PDF.

¹⁵ “Performance-Based Regulation: Harmonizing Electric Utility Priorities and State Policy,” National Conference of State Legislatures (Accessed July 5, 2023). https://www.ncsl.org/energy/performance-based-regulation-harmonizing-electric-utility-priorities-and-state-policy.

¹⁶ Gennelle Wilson, Cory Felder, Rachel Gold, “States Move Swiftly on Performance-Based Regulation to Achieve Policy Priorities,” RMI (March 31, 2022). https://rmi.org/states-move-swiftly-on-performance-based-regulation-to-achieve-policy-priorities.

¹⁷ Herman K. Trabish, “Hawaii’s New Fuel Price Performance Incentive Gives HECO ‘Skin in the Game,’” Utility Dive (August 6, 2018). https://www.utilitydive.com/news/hawaiis-new-fuel-price-performance-incentive-gives-heco-skin-in-the-game/528329.